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What do you Think of the Penalties in These Three Cases of Unreported FBARs ?

Ty Warner

Ty Warner, founder/owner of the Beanie Babies line, was sentenced in July 2015 for tax evasion.The panel of three U.S. District Court judges gave him 2 years of probation and 500 hours of community service. The sentencing guidelines ranged from 46 months up to a maximum of 57 months. He agreed to pay back taxes and interest of $16 million as well as a $53.5 million penalty (the full FBAR penalty of 50% of the balance of the highest account-$107,000,000). According to Melissa Harris (author of this article that appeared in the Chicago Tribune, July 15, 2015) Warner’s sentence was “a punishment that reduces evading millions in taxes to a speeding ticket,” and that the sentence “flies in the face of both reason and justice”.

He admitted that around Jan. 31, 1996, he flew to Zurich and deposited about $80 million at UBS AG, instructing that no account statements be sent to him in the U.S., and that he kept the account secret until November 2007. During that period he failed to report at least $24.4 million in interest income on the account to the Internal Revenue Service, evading at least $5.6 million in taxes. He also failed to file with the Treasury the required annual “FBAR” report on his foreign accounts

What beggars belief is that Mr. Warner never provided any explanation for:

why he opened the account

the origin of the funds

audits of his books & records show the funds did not come from his company

his personal domestic accounts showed no signs of the origin of the funds

In fact the evidence suggested that the funds may have been pre-tax payments of some sort. To this day, the extent of his willful tax evasion is in reality, unknown.

So why did Mr. Warner get off so lightly? Was it because his lawyer Mark Matthews used the Olenicoff Defense?
Was it because his creation, the Beanie Babies line of stuffed toys, was just too cute for anyone to believe he was guilty of such evasion?

Peter Henning a Wayne State University Law School Professor and co-author of ‘Securities Crimes ”said in an interview, “I don’t want to say anything goes,….Clearly you can’t consider race or wealth. But you are looking at character. That is something judges can take into account. The question is how much should it weigh into the decision?”

This is where Mr. Warner hit the jackpot. He received 70 letters of support from friends, employees and recipients of his charity, actions which had nothing to do with the charges and only someone with money could do.

U.S. District Judge Charles Kocoras (of the panel) based his sentence on:

…..a reading of 70 letters, Kocoras found that “Mr. Warner’s private acts of kindness, generosity and benevolence” were “overwhelming,” with many occurring before he was under investigation and, in Kocoras’ words, motivated by “the purest of intentions.” Most were done “quietly and privately.” The judge concluded: “Never have I had a defendant in any case — white-collar crime or otherwise — demonstrate the level of humanity and concern for the welfare of others as has Mr. Warner.”

So a man guilty of many years of tax evasion, who did not even account for the origin of the account nor any records of it, received an incredibly light sentence based upon support from his family, friends and beneficiaries of his kindness. Where is the law here?

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Dan Horsky The second case is that of retired university business professor Dan Horsky. He amassed a $220 million dollar fortune, hidden in secret foreign accounts. He was a citizen of the United States as well as Israel and the United Kingdom. He spent thirty years teaching at the University of Rochester in Rochester, New York.

One investment in a business referred to as Company A, however, succeeded spectacularly. In 2000, Horsky transferred his investments into a nominee account in the name of “Horsky Holdings” at an offshore bank in Zurich, Switzerland (the “Swiss Bank”) to conceal his financial transactions and accounts from the IRS and the U.S. Treasury Department.

In 2008, Horsky received approximately $80 million in proceeds from selling Company A’s stock. Horsky filed a fraudulent 2008 tax return that underreported his income by more than $40 million and disclosed only approximately $7 million of his gain from the sale. The Swiss Bank opened multiple accounts for Horsky to assist him in concealing his assets: including one small account for which Horsky admitted that he was a U.S. citizen and resident and another much larger account for which he claimed he was an Israeli citizen and resident. Horsky took some of his gains from selling Company A’s stock and invested in Company B’s stock. By 2015, Horsky’s offshore holdings hidden from the IRS exceeded $220 million.

Horsky willfully filed fraudulent federal income tax returns that failed to report his income from, and beneficial interest in and control over, his foreign financial accounts. In addition, Horsky failed to file Reports of Foreign Bank and Financial Accounts (FBARs) up and through 2011, and also filed fraudulent 2012 and 2013 FBARs. In total, in a 15-year tax evasion scheme, Horsky evaded more than $18 million in income and gift tax liabilities.

Professor Horsky’s willfulness was more involved than simply failing to report income. In 2011, He had another individual gain signature authority over the Zurich accounts. Horsky provided instructions to this individual. Then this individual was to relinquish his U.S. citizenship. In 2014, this operson filed a false 8854, did not disclose his net worth or his foreign assets and he falsely certified five years of compliance with all tax obligations.

Mr. Horskey’s sentence consisted of:

seven months in prison

one year of supervised release

fine of $250,000

$100 million penalty

over $13 million in taxes owed

Again, the prison sentence was far below the maximum of five years. I guess committing an intensely willful crime which included outright fraud (and no letters attesting to his character), Professor Horsky failed to even receive one year of prison.

An interesting observation of Eric Rasmussen at thetaxprof site : (Scroll down to “comments”)

Interesting settlement. He’s paying just $13 million of the $18 million in taxes he owes, but $100 million more in penalties? Is this a whistleblower case? The IRS used to say the whistleblower gets a percentage only of the taxes recovered not the criminal violation penalties. They lost a big case on that in Tax Court. Is the idea going to reappear here?

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Milo & Lois Kentera

NB: all printscreens in the Kentera account are from the Complaint filed August 13, 2016

The third case is that of Milo and Lois Kentera. This is much closer to the “minnow” level of FBAR “violation.” Even though this is not an expat case as the Kenteras live in the US, I am sure we all can identify with them.

Milo Kentera was a pharmacist and inherited a Swiss bank account when his father died in 1984. At this time, the account was under $10,000 USD and remained so for twenty years. During that time, Milo added his wife Lois (a homemaker) to the account. Starting in 1984, he always advised his tax advisors/accountants of the account and he reported it on 1040 Schedule B. So far so good.

In 2005, the account gained enough to be over the FBAR filing threshold. However, the accountant did not prepare or file an FBAR. In 2007, Milo received $257,112 (a portion of the sale of his parents’ property in Montenegro; his siblings received the other $371,536). He put this money into the Swiss account. A second accountant did not ask if any interest was earned on the account so that was omitted and again, no FBAR was filed. In 2010, yet another accountant failed to prepare or file an FBAR even though he/she included the interest and the account on Schedule B.

Mr. Kentera came forward on his own, having heard of the OVDI on the radio.

By then the “2011 IRS Reign of FBAR Terror was going full throttle. Toward the deadline of the program, the Kenteras entered the 2011 OVDI program. They filed six years of FBARs for 2005-2010 (inclusive) and amended their returns to include the interest income from the account. The following printscreens show the amounts of money involved in terms of omitted tax income, balance of the account etc.

Nearly two years later, in August 2013, the IRS assessed a miscellaneous penalty of $90,092. The Kenteras then chose to opt out of OVDI. The agent who had their case then advised that they should receive non-willful FBAR penalties, which were as follows:

Lois Kentera:

$500 for 2006;

$2,500 per year for 2007, 2008, 2009, and 2010,

for a total penalty of $10,500;

Milo Kentera:

$500 for 2006;

$10,000 per year for 2007, 2008, 2009, and 2010,

for a total penalty of $40,500.

The Kenteras were understandably upset and did not want to accept this fine of $60,000 either as they felt they had reasonable cause. Virginia la Torre Jeker defines what is involved in establishing reasonable cause when one has relied upon a tax adviser:

“…various cases have noted that the taxpayer must prove three elements. First, the adviser must be a competent professional with sufficient expertise (for example, you cannot rely on an insurance agent for tax advice); second, the taxpayer must provide necessary and accurate information to the adviser; and finally, the taxpayer must rely in good faith on the adviser’s judgment.

It would appear obvious from the get go that the Kenteras did not belong in the OVDI program. However, “quiet disclosures”* were discouraged and Streamlined was not yet available (began Sept 1, 2012); the FactStatement 2011-13 came out during the first week of December. The Kenteras were put in a program they did not belong in; they clearly satisfied the three conditions for “reasonable cause” and most of all, they are an example of “those that are hurt the worst are the ones who try to come into compliance.”

**it was not entirely clear at that time whether a “quiet disclosure” was simply filing going forward OR filing amended returns (presumably changed by FBAR accounts’ earnings). In any event, while the IRS insisted people enter the programs, there is no law that indicates one must do so.

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These three cases present some interesting observations about the treatment of those who had not filed FBARs.

First of all, the first and second cases are Homelanders who had very large offshore accounts. Both took very deliberate steps to conceal the accounts. Mr. Holsky even went so far as to include fraudulent attempts as to ownership and citizenship of the person with signing authority for the account. Neither of them came forward on their own. Neither were able to enter the “amnesty” program, yet Mr. Warner received no jail time and Mr. Horsky received less than a year. The amounts of money involved for both are staggering to those of us who will never have anywhere near that kind of money.I can’t really evaluate their impact but I’d be willing to bet, that in proportion to their total wealth, both were able to absorb the loss without a major change in their style of living.

In contrast, the Kenteras, also Homelanders, had a very modest account which they inherited. They always advised their accountants of its existence. Three professionals in the tax compliance community failed to prepare or file FBAR even though two of them did report the interest and existence of the account on Schedule B. They received very bad (I would say criminal) advice and went into OVDI coming out with an original penalty assessment of $90,092. So they opt out and the IRS agent then gives then a non-willful penalty totalling $60,000.

Was it really necessary for Mr. Kentera to receive the maximum non-willful penalty for 4 years? It seems their honesty in pointing out the existence of the account counted for nothing. The fact remains that their situation clearly QUALIFIES FOR REASONABLE CAUSE. Yet the intent of Mr. Warner and even more so for Mr. Holsky, was clearly to conceal yet neither of them received anywhere near the maximum penalty; they did not come forward on their own and could not take part in the amnesty program.

In the past (scroll down to “Statistics on Minnows in the OVDP”) we have seen demonstrations that the least wealthy pay the highest percentage of penalties, the comparison of the three cases cannot fail to boil your blood and make the average person seriously consider not becoming compliant due to obvious treatment of “minnows” as nothing short of appalling. Why does the IRS continually fail to see this? Is it really a surprise that 7 out of 8 million #Americansabroad have yet to become compliant in spite of Streamlined?